Even in a quiet market with some falling house prices caused as a consequence of overheating (due to a number of reasons), there is still always some market activity. It is not just the three “D’s” of Debt, Divorce and Death which create inevitable market activity.
Indeed, there is still a reasonable amount of activity in the market in certain sectors especially at the upper end of the market. Also a number of people are in rented property paying circa £1,000 per calendar month rental holding off from buying a property. As the price of property in the market falls (although the rate of fall has declined), these people are typically saving by not owning a capital item that is losing perhaps an estimated 1% of its notional capital value per month.
Some of these people are prepared to take the plunge back into the property market soon for a number of reasons, both real and psychological. One reason is that they are used to living in their own homes and like to have that mental perceived security of “bricks and mortar”. However these persons are usually only prepared to move for the right property and at an apparently attractive price.
Economic reasons however remail the most important factor. As the differential between their property rental costs compared to their investment income generated by interest narrows, and the rate of fall of house prices declines, many of this hidden sector of prospective purchasers may start to re-enter the property market. This is especially so as prospective purchasers attempt to judge the bottom ot the economic cycle.
Whether the lower interest rates (providing lower rewards to savers) as well as the uncertainties within the banking sector may help push these cash rich people back into the market cannot as yet be determined. The slashing of the Bank of England base rate may also increase the percentage of those prepared to borrow either again, more or for the first time which is the most apparent sector affected by the interest rate reductions over recent days.
It may not be just the direct effect of the Interest rate adjustment on the mortgage rate which may have a significant effect on the gradual recovery of the property market, but the indirect route could also play a significant role.
10th November 2008